What you need to know about adjustments in the field of Transfer Pricing?

The end of the year is approaching. Most companies are making the final settlements for the entire 2022. This is the last moment to thoroughly analyze any necessary adjustments to settlements, prices or terms of contracts.

Meanwhile, adjustments constantly raise interpretation doubts – in terms of their definition as well as specific conditions for correct tax settlement.

These are the three most frequently asked questions regarding transfer pricing in the context of adjustments.

1. Is each adjustment with related parties a transfer adjustment?

Not every adjustment between related parties is a transfer pricing adjustment. However, each transfer pricing adjustment is made between related parties.

There is no definition of transfer pricing adjustment in an CIT Act. However, you will find it in the explanations released by the Ministry of Finance. TP adjustment means adjusting (correcting, aligning) the transfer price, understood as the remuneration, financial result, financial ratio or a financial result (otherwise defined) of the conditions agreed or imposed between related entities as a result of existing relationships between them. The purpose of the transfer pricing adjustment is to adjust the transfer price for a given period to the arm’s length principle.

Thus, in order to assess whether an adjustment is a transfer pricing adjustment, it is necessary to verify its purpose and the reasons for its implementation.

2. Can a transfer pricing adjustment be safely included in tax revenues/costs?

Yes, as long as the conditions listed in Article 11e of the CIT Act are met. Since 2022 the conditions are:

Condition 1

• controlled transactions made by the taxpayer throughput the financial year feature conditions that third parties would have established.

Condition 2

• in the case of the adjusted controlled transaction, there must be a change in significant circumstances (e.g. extraordinary changes in the market, changes in interest rates) or the actual costs incurred are known or revenues are known which are the basis for calculating the price and ensuring their compliance with the conditions that would have been established by third parties requires adjustments to transfer prices.

Condition 3

• having a statement from a related entity or an accounting document confirming that the TP adjustment was made in the same amount as by the taxpayer.

Condition 4

• there is a legal basis for the exchange of tax information with the country where the related entity has its place of residence, registered office or management.

In the case of in plus adjustments, the first two conditions must be met. However, all of them must be met in order to include in minus adjustments as tax costs/income.

3. How often should transfer pricing adjustments be made?

The explanations regarding the adjustments compiled by the Ministry of Finance state that they should be made as often as independent entities would be making them. However, third parties never make transfer pricing adjustments in their settlements since from the nature they concern transactions with related entities.

Sample factors determining the frequency of transfer pricing adjustments have been listed in the explanations – and these are helpful hints. Examples:

• specific nature of a given industry,
• specific nature of transactions and settlements,
• volatility of business and economic factors,
• occurrence of circumstances having a significant impact on the change in the original price,
• the availability of more reliable comparative data.

Thus, an individual assessment is necessary in this regard in each case. In practice, the most commonly applied frequencies for adjustments are quarterly, semi-annual or annual. However, first of all it is the amount of the adjustment that should be taken into account. If it is significant, tax authorities may have doubts as to whether the first condition has been met (i.e. an ex ante determination of arm’s length prices).

How to correctly identify a transfer pricing adjustment?

Transfer pricing adjustments are a complicated process and require a very detailed analysis. Also, they involve a number of matters – on top of the above-mentioned, it is necessary to consider, for example, what document should be used to settle the adjustment and how it affects customs. These issues will be discussed in our blog soon.

We encourage you to participate in our training (on demand): ‘Tax adjustments for VAT, CIT, TP and customs duties – everything you need to know before closing the year’.